Swiss Court Nixes UBS Tax Deals

Switzerland’s Federal Administrative Court has ruled that the agreement for UBS to disclose the identities of 4,450 U.S.-based taxpayers to the IRS violates the country’s banking secrecy laws.

The ruling last Friday on 26 sets of bank accounts threatens a deal that the Swiss and U.S. governments hammered out last August after a prolonged legal dispute. The Swiss government has not yet handed over the 4,450 names to the U.S. government. The Swiss Federal Tax Administration has been reviewing the cases and decided about 600 to date.

Last February, UBS agreed to pay $780 million to the Justice Department and hand over 255 accounts of U.S.-based taxpayers to avoid prosecution. However, the same Swiss court ruled earlier this month that that deal was also a violation of Switzerland’s banking secrecy laws. The impasse may be solved by amending the tax treaty between the U.S. and Swiss governments, but the agreement would have to be approved by the Swiss parliament.

So far, about 14,700 U.S. taxpayers have come forward to reveal their offshore bank account holdings as part of a voluntary disclosure program, according to the IRS, but it is unclear how many of them held accounts at UBS.

"We have every expectation that the Swiss government will continue to honor the terms of the agreement," the IRS said in a statement.

The Swiss court ruling involved a UBS client who had appealed to prevent her bank account information from being shared with the U.S. The court ruled that the double taxation treaty between Switzerland and the U.S. only permits information to be disclosed in cases of "fraud or the like." The UBS client had not filed a tax form with the IRS disclosing the bank account, but the court ruled that this did not constitute fraud, even if there were large amounts of money in the account.

The Swiss tax department could appeal the ruling. The Swiss cabinet plans to meet on Wednesday to discuss its next move in light of the court ruling.